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Australia and UK Concerned About Overheating Housing Market

22 October, 2011



Australia and UK concerned about overheating housing market

Experts in the UK and Australia are expressing concern that policy measures will cause their respective housing markets to overheat.

The Reserve Bank cut interest rates to a record low of 2.5% this week, but already concerns are mounting that the broad tool designed to stimulate an inhibited economy could add too much heat to the housing market.

With three of the big banks immediately announcing their intention to pass the cuts on in full to mortgage customers, and Westpac set to cut even further, mortgage rates are now set to fall below 6% across the board, which will spur demand for home-ownership in affordable areas.

But first-time buyers could be negatively affected if increased demand drives up prices.

“With values rising it is going to be more difficult for prospective owners, particularly those without equity behind them, to come up with a deposit,” said Tim Lawless, the national director of research at RP Data.

“This affordability challenge is likely to be most felt by the first home buyer segment and it may be the factor that continues to prevent prospective first time buyers from entering the housing market.”

Data from the ABS House Price Index revealed that house prices in capital cities have increased by over 5% in Australian capital cities.

In the UK, concerns are also being raised that stimulatory schemes could drive prices beyond the level of those they are trying to support.

Growth has been elusive, despite interest rates sitting at a record low of just 0.5% since 2009, which has led the British government to seek further measures to boost the housing market.

One of these, the Funding for Lending Scheme, has driven down mortgage levels to record lows, especially for those with existing equity, and the number of house purchase completions is much higher this year.

Concerned that first-time buyers were being overlooked, the government then announced ‘NewBuy’, a guarantee scheme for buyers with small deposits to buy new-build homes.

This will be furthered in 2014 by the ‘Help to Buy’ equity loan scheme, which allows consumers with small deposits to apply for a state guarantee of up to 20% of the value of a home.

Like Australia, the UK is seeing house prices rise as stimulatory measures make mortgages more attractive.

But the existing measures have already seen an effect on prices, which are rising at their fastest level for three years, and could now increase between 6% and 8% in London this year.

And unless the supply of housing increases to match demand, the housing market could be set to enter a new bubble.

There are similar concerns in Australia, where the Reserve Bank has not delivered on its intentions to drive housing construction.

“Home building approvals fell for a second successive month in June,” noted Shane Garrett, economist at the Housing Industry Association.

“The HIA Trades Report highlighted ongoing soft labour market conditions in the residential construction industry,” he added.

The challenge remains in both countries, then, of how to stabilise the market without alienating the more vulnerable house hunters and without compromising growth elsewhere.

Keith McDonald
Which4U Editor

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